Now’s the Time to Get Ready for FedNow
Part 1 of 2: What does the instant-payments landscape look like now, and how will it change when the Fed enters the market later this month?
The Federal Reserve’s FedNow service has been in the works for years. The instant-payment settlement platform provides an alternative to the Real-Time Payments (RTP) network from The Clearing House, and it just went live this morning. The Fed also announced that 35 banks and credit unions are early adopters, and 16 service providers (including Kyriba) are ready to support instant-payment processing.
To better understand how organizations should be preparing for the launch of FedNow, Treasury & Risk sat down with Bob Stark, the global head of market strategy for Kyriba and a long-time commentator on treasury and payment innovations. Note that our conversation happened before FedNow went live.
Treasury & Risk: FedNow is stepping into a market where the RTP network has been operating for several years. Are you seeing a lot of demand within corporate treasury teams for instant payments?
Bob Stark: So far, adoption of real-time payments has been decent, but I feel that mass adoption might still be around the corner. I commend The Clearing House for developing the first new payment network in the U.S. in 40 years. They built something brand new, and they were the first to market—they trailblazed this option. That said, the availability of FedNow might accelerate corporate adoption of both types of instant payments.
Although there are many advantages, our clients that use the RTP network especially like that real-time payments are less expensive than wire transfers. That will soon be the case for FedNow payments as well, and having more choices will encourage broader adoption. Also, frankly, for some banks that are evaluating the business case of investing in this, having the Fed enter the market brings a certain additional level of comfort. The Clearing House has been a respected organization for a long time, and the Fed’s involvement provides even more validation for the business case for instant payments. I expect FedNow to create something of a tailwind in the market.
T&R: What are the differences between FedNow and RTP payments?
BS: The most widely publicized difference is the maximum payment amount. For the RTP network, that limit is currently $1 million. FedNow will start with a max of $500,000, but participating banks will be able to choose between allowing FedNow payments up to the Fed’s $500,000 maximum and setting a lower limit for payments they send, such as $100,000.
An interesting strategy by the Fed is their work around standardizing use cases for XML messaging, including for procure-to-pay and invoice-to-cash. For payments specifically, XML ISO 20022 messages allow for payments to also carry remittance information. Ultimately, A/P [accounts payable] and A/R [accounts receivable] should be able to see the same dollars and data, in the same message, for every transaction. This convergence of dollars and data is important because with ACH payments, for example, the remittance information is often sent by email in a completely separate channel from the payment. Delivering all payments data instantly is potentially a big difference-maker for finance teams who want to apply and free up cash in a real-time environment.
It’s also worth noting that FedNow is aligned to the Fed’s wire clock in terms of settlements. FedNow payments are 24×7, but transactions after the Fed wire cutoff—which is 7pm Eastern Time every day—will be considered next-day payments. The Clearing House doesn’t have that; RTP payments go by the day, up till midnight Eastern. Some organizations have decided to stick with RTP for now because their use case is to have all-hours payments. They may be initiating payments out of, say, an APAC [Asia-Pacific] treasury center whose workday starts at 7pm Eastern.
T&R: Can FedNow and the RTP network handle cross-border payments?
BS: No, not on their own. Currently, we’re talking only about domestic payments. The Clearing House has done some work with RT1 [the real-time payment settlement system for execution of Single Euro Payments Area (SEPA) instant credit transfers]. Its goal is to connect RT1 to the RTP network, with SWIFT playing a valuable role in connecting the networks. That effort may eventually result in a capability where cross-border payments between the U.S. and Europe take a matter of seconds.
For an early example of this type of capability, you can look at PayNow in Singapore, which uses middleware to connect with UPI [United Payments Interface] in India, as well as other regional instant-payment networks. Their experience so far reveals some of the challenges of building a cross-border instant-payment network—the cost, the friction, the banking participants. FedNow is not even trying to go in this direction, at least at this point.
So, we’re a ways out from companies being able to instantly transfer money anywhere in the world. Still, more adoption of instant payments, by having FedNow in addition to The Clearing House RTP, will probably bring more organizations on board and provide more volume to drive innovations in the cross-border arena. Around 30 banks are currently on the RTP network. As the number of participants across both networks rises into the hundreds, and the corporate adoption rate goes up to more like 50 percent, suddenly there will be a greater justification for participants to try to connect various domestic instant-payment networks. That will be very exciting for a lot of organizations.
T&R: So that’s something we’ll be interviewing you about in a few years.
BS: I hope it’s not a few years. I hope it’s a lot quicker than that, but progress so far has been relatively slow. I feel like FedNow will provide a tailwind for instant payments that will really help U.S. corporates catch up to what’s being done in other parts of the world. And then we will see more innovation. But it may be at least a year or so before we talk about this again.
T&R: What will adoption of FedNow look like? Certain banks will adopt it first, right?
BS: Yes, it will follow a similar model to what The Clearing House did with the RTP rollout. Your bank will need to support sending and settling payments on the FedNow network. There are some nuances to it, but the main thing for corporate treasurers to understand is that opting in isn’t enough. Banks will need to do some development work to integrate with the FedNow network, just as they did for the RTP network.
T&R: What about for corporate treasury groups—what do they need to be doing to prepare?
…
Read Bob’s response in Part 2 of this article.